Related Search

Chancellor George Osborne delivered his sixth and final Budget of this parliamentary term on Wednesday, which also turned out to be one of the most uneventful.

20/03/2015

Azad Zangana

Senior European Economist and Strategist

With an election looming, Osborne took the opportunity to highlight the achievements of the coalition government, along with delivering a vision of what his party would aim to deliver if they were returned to government.

Economic outlook: migration impacts growth forecast

The independent Office for Budgetary Responsibility (OBR) was able to revise up its forecast for real GDP growth in 2015 from 2.4% to 2.5% (the Schroders forecast is for growth of 2.6%), along with its 2016 forecast, which was lifted from 2.1% to 2.3% (Schroders expects 2.0%). The main driver of the upgrade is the fall in global energy prices, which has helped to lower energy inflation and increase real disposable income for households. Together with a lower unemployment forecast, the growth outlook looks more positive for the domestic economy.

Lower oil prices also dominate the inflation forecast. The OBR has cut its 2015 forecast for CPI inflation from 1.1% to 0.2% (Schroders projects 0.6%), and the 2016 forecast from 1.7% to 1.2% (Schroders expects 1.3%). Although the fall in oil prices is a global and largely external phenomenon, the Chancellor took full advantage of the opportunity to highlight the positive implications for living standards and public finances.

The longer-term forecast was, in our view, the most interesting part of the OBR’s analysis. The OBR has revised up its trend-growth estimate from 2.2% to 2.3% due to recent trends in migration. While growth in the working age population is still expected to slow, the OBR has been forced to lift its expectations for inward migration, especially as the latest figure for annual net inward migration has been about three times larger than the OBR had estimated. While the OBR assumes the next government will seek to reduce migration, it cannot continue to assume such low numbers. This suggests that the economy will be able to grow at a slightly faster pace without generating excessive inflation. However, its latest update of the output-gap suggests that there is less spare capacity than previously thought. Indeed, the OBR estimates that the output-gap will close by the end of 2017 – two years earlier than its previous estimate.

Energy prices to boost fiscal position

Public sector net borrowing (PSNB) as a share of GDP is unchanged in the OBR’s forecast for this financial year and 2015/16. It has been slightly nudged down for the following three fiscal years, but then revised up by 0.7% of GDP in 2019-20. The OBR expects the government to achieve a budget surplus in 2018/19 (unchanged), but for debt as a percentage of GDP to start falling by 2015/16 (one year sooner than previously forecast). Upward revisions to the growth forecast help improve the public finances, but again, lower oil prices have been key. The OBR estimates that lower oil and gas prices along with lower inflation more widely, will increase tax receipts by £8.2 billion and cut public expenditure by £30.1 billion.

Another important boost has been lower-than-expected expenditure on interest payments on existing debt. The Chancellor stated that he will look to lock in ultra-low interest rates by redeeming several old debt issues and replace them with long-dated bonds. The OBR assumes lower interest rates will cut spending by £15 billion over the forecast horizon, and also increase tax receipts by £2.5 billion.

Policy changes to reward savers

Most of the policy changes announced in the Budget focused on key areas for the government. Help for savers, help for struggling industries, and ensuring fairness in terms of contributions continues to be a key theme.

For savers, the big change was the introduction of a new personal savings allowance, where the first £1000 interest on savings for basic rate tax payers will be tax free (£500 for 40p tax payers). In conjunction with the already generous annual ISA allowance, the government wants to show that it is rewarding savers in an attempt to change the country’s excessive borrowing and spending culture. Of course, the best way to do so would be to raise interest rates, but I doubt the Chancellor wants that.

ISAs will become flexible, allowing users to withdraw and then returning money into their annual allowances. Also, there will be more help for those struggling to get on to the housing ladder. “Help to Buy” ISAs will boost the deposits for first time-buyers by 25%. This is an entirely political move in our view that aims to win over struggling entrants to the market, but inflames the problem of an expensive, poorly supplied market.

For pensions there were two significant changes. The lifetime allowance will be cut from £1.25 million to £1 million from April 2016, while pensioners who want to cash in their annuities will no longer be charged 55%, but the marginal tax rate instead. The reduction in the lifetime allowance is an issue of fairness (and the need to raise more revenues), but will the allowance now be indexed to inflation? Also, the ability to sell annuities certainly offers more flexibility for those unfortunate enough to have had to buy policies in the low interest rate environment of recent years.

Tax in the spotlight

For businesses, the most significant change will be the introduction of a Diverted Profits Tax – also dubbed the “Google Tax’” by the press. This is designed to make multinationals pay a fair share of corporation tax, which many are accused of avoiding through aggressive transfers of profits and the use of charges. Whether this will be workable is yet to be seen, but there is a growing international consensus that the practice has gone too far.

Another significant change will be for North Sea oil and gas companies, who will see the supplementary charge cut from 30% to 20%, and petroleum revenue tax fall from 50% to 35%. The industry was in sharp decline even before the huge fall in oil prices. These tax cuts will help slow the rot, but with the cost of extraction rising as easy-to-reach wells are depleted, the sector may yet see further help from the next government.

Banks were again at the sharp end of the Budget. The annual levy was increased as expected, which should disarm the opposition who has been calling for such a move. Otherwise, the Chancellor announced a review of business rates, and new tax credits for various struggling sectors.

With regards to personal taxation, the tax free allowance will increase to £10,600 in 2015/16, to £10,800 in 2016/17 and £11,000 in 2017/18. The threshold for paying the higher rate of 40% will also rise, but not until 2017/18.

Otherwise, there were various other tweaks including the supposed “death of the annual tax return”, but overall, not a great deal of change on the personal tax front. Finally, duties and excise on beer, cider and Scotch whisky were all cut, but other spirits including wine were unchanged. The scheduled rise in petrol duty was cancelled again, while tobacco duties will rise as usual by 2% plus inflation.

Austerity is far from over

Overall, the Chancellor’s final budget of the parliament turned out to be one of the most uneventful. The economic outlook looks favourable, while the public finances are slowly improving. The measures announced are broadly fiscally neutral, and will have a negligible impact on growth and inflation in the near term. The Chancellor promised a gimmick-free Budget, but he may have had little choice in the matter given the still significant budget deficit. While Osborne claims that he is taking the nation from “austerity to prosperity”, the truth is that there is a lot more of the former to come. According to the OBR, the annual growth rate of the budget for day-to-day spending on public services and administrations is expected to fall in real terms from -1.3% in 2015/16 to -5.4% and -5.1% in 2016/17 and 2017/18. In other words, the next government spending review will see spending cuts in the first two financial years that are greater than the previous six years!

Austerity is far from over, which makes us question whether the next government will really be able to deliver anything as robust as the OBR’s assumptions – especially as we are very unlikely to see any political party win an overall majority in May’s election.

In his Budget announced on Wednesday 16 March, UK Chancellor George Osborne chose to focus on small tax breaks, reforms and micro spending announcements, while glossing over the extra austerity planned.

Please note that US investors are not eligible to invest in these types of securities. This website and the content included is intended for non-US citizens and financial professionals who advise on behalf of non-US citizens.

Schroder Investment Management (Luxembourg) S.A. was launched in January 1995 and provides central support to Schroders' European Mutual Fund Business. Schroder International Selection Fund (Schroder ISF) is a Luxembourg registered open-ended umbrella Fund.

Investment products managed by Schroder Investment Management (Luxembourg) S.A. are generally not registered in the United States or many other jurisdictions. Accordingly, they are not available to investors in those jurisdictions unless exemptions from local registration requirements apply. Please consult your financial adviser or intermediary for information about the availability of these types of investment products in your jurisdiction.

Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Any past performance figures shown are not indicative of future performance. Exchange rate may vary and cause the value of international investments to rise or fall. The levels and reliefs from taxation may change. Tax reliefs referred to are those currently available and their value depends on the circumstances of the individual investor. Investment in emerging markets involves a high degree of risk. Investment in any sub-fund mentioned herein should not be made without careful reference to the relevant prospectus. The information contained in these pages does not form part of any contract, nor can you rely on it for any contractual purpose.

The information contained on this site is not an invitation to subscribe. Subscriptions will only be received and shares issued on the basis of a fund's current prospectus and the latest audited annual report. Copies of each fund's current prospectus and the latest audited annual report may be obtained from Schroder Investment Management (Luxembourg) S.A. or your Schroders branch office.

Schroder Investment Management (Luxembourg) S.A. and the Schroder International Selection Fund are regualted and subject to the Luxembourg law dated 17 December 2010.

Disclaimer of Warranty and Limitation of LiabilitySchroder Investment Management (Luxembourg) S.A believes that the provided information is accurate as at the date of publication but no warranty of accuracy is given and no liability in respect of any error or omission by a third party is accepted by Schroder Investment Management (Luxembourg) S.A or its affiliates or any director or employee of Schroder Investment Management (Luxembourg) S.A or its affiliates.

In the event of any provision of these Terms and Conditions being deemed unenforceable, the remaining terms and provisions shall be unimpaired and the unenforceable term or provision shall be replaced by an enforceable term or provision that comes closest to the intention underlying the unenforceable term or provision.

Schroder Investment Management (Luxembourg) S.A may modify these Terms and Conditions at any time, with immediate effect and without prior notice.

PrivacySchroder Investment Management (Luxembourg) S.A is as concerned as you are about the privacy of any personal information you may provide to us through this site. When you visit this site, you are not required to provide us with any personal information other than your country of residence, unless you choose to do so. Our web server will not recognize your domain name or e-mail address, only your indicated country of residence.

Schroders’ web sites use "cookies" for collecting user information from certain pages of the web sites. By "cookie" we mean the small text file that is stored on the hard disk of a computer by the web browser on a computer. It contains information sent by the web server of the web site that a user has visited. A cookie identifies users and can store information about them and their use of a site. Schroders uses cookies to keep track of user activity and to store a user’s username and password to allow the user access to some of its protected web sites. The information derived from cookies enables Schroders to identify which areas of the web site are more interesting so that we can improve our web sites and the information we provide to users. The cookies that Schroders uses to store user name and passwords are encrypted and cannot be read. A user can choose not to accept certain cookies by turning this feature 'off' within the browser settings, however doing this may detract from 'user experience' of certain web sites or even prevent access to some of our websites.

Use of LinksThe Website may contain links to Websites published by third parties. Links to this Website may also be included on third party Websites. Schroder Investment Management (Luxembourg) S.A has not reviewed any of the third party Website which link to the Website or to which the Website links. It is not responsible for the content to be found directly or indirectly on any third-party website nor does it endorse or recommend the products and services presented on any such third-party website. Following links to any third-party website or pages shall be at your own risk.

The Website and the information or other material contained in it are not directed to, or intended for distribution to, or use by, any person or entity who is a citizen or resident of, or incorporated or located in any jurisdiction where such distribution, publication, availability or use would be contrary to local laws or regulations, or where Schroder Investment Management (Luxembourg) S.A would infringe any registration or licensing requirement within such jurisdiction.

Electronic Mail FunctionThe possibility to communicate by E-mail between you and Schroder Investment Management (Luxembourg) S.A is only a convenience granted by Schroder Investment Management (Luxembourg) S.A. You acknowledge the limitations on the reliability of delivery, timeliness and security of internet E-mail and understand that Schroder Investment Management (Luxembourg) S.A will not be responsible for any loss or damage that could result from your requests not being accepted, confirmed or processed or as a result of your E-mails being intercepted by third parties. As a result of these concerns, you should not send sensitive information by E-mail, which may not be secure. If you do so, you do it at your own risk.

Intellectual Property RightsThe information and materials contained in the Website are protected by intellectual property rights, which are owned or claimed by Schroder Investment Management (Luxembourg) S.A, its affiliated entities or third parties. The information and materials may be displayed and printed exclusively for your personal, non-commercial use, provided that you do not remove any intellectual property right or other notices therein. You agree not to transmit, reproduce or sell the information and materials contained in this Website in whatever form and by whatever means without the express prior written consent of Schroder Investment Management (Luxembourg) S.A.

Applicable Law and JurisdictionYour access to, visit to and use of the Website, and the present Terms and Conditions are governed by and shall be construed in accordance with Luxembourg law. The Courts of Luxembourg shall have exclusive jurisdiction over any dispute relating thereto, without prejudice to the choice of Schroder Investment Management (Luxembourg) S.A for having any other court jurisdiction over such a dispute under any applicable law.